Johannesburg, 31 March 2017 — Global Credit Ratings (“GCR”) has downgraded the long-term and short-term national scale ratings of The Company for Habitat and Housing in Africa (“Shelter Afrique”, “the company”) to B(KE) and B(KE) respectively. Furthermore, GCR has downgraded Shelter Afrique’s international scale foreign currency (“FC”) rating to B-. The ratings have been placed on Rating Watch.
This rating action reflects the increased risk that Shelter Afrique might not be able to meet its existing debt obligations in the coming months, as a result of the following:
- Low liquidity levels. Despite a USD20m lending facility recently provided to Shelter Afrique by the African Development Bank (“AfDB”), the company’s liquidity buffer remains weak following a reduction in the availability of credit lines, which has not been adequately compensated by the quantum of committed capital injections and cash receipts from loan repayments to date. GCR estimates that the company’s available cash resources and expected inflows are inadequate to cover scheduled repayments on borrowings of c.USD112m in 2017.
- Limited access to additional debt funding. Shelter Afrique’s fundraising capacity has been reduced by deteriorating investor sentiment, which comes on the back of allegations of accounting malpractices and the subsequent findings of a forensic investigation by Deloitte published in its Factual Findings Report (“the report”)1.
- Lower expected internal cash generation. The company recently released a profit warning, expecting earnings for the 12-month period to 31 December 2016 to drop by more than 25% as a result of a sharp increase in the level of impairment charges to provide for expected losses from the loan portfolio. Furthermore, in response to liquidity challenges, Shelter Afrique has limited new loan origination. Interruption in the lending cycle, together with increased asset quality concerns highlighted in the report, are likely to constrain the quantum of the company’s loan receivables, reducing its internal cash generation capacity in the short to medium term.
- The timing of capital inflows remains uncertain. During an extraordinary shareholders meeting held in January 2017, shareholders committed in principle to honouring their capital subscription arrears of USD90m by the end of 2017. Thus far, written commitments from shareholders amount to USD53m, cash receipts from shareholders total USD14m, and a further USD23m in capital injections has been approved but not disbursed. Due to the lengthy approval process in the respective governments, there remains uncertainty over the promptness with which shareholders will release the remaining capital which has been committed.
The significant efforts currently being undertaken by management (in consultation with AfDB and other highly reputable consultants) to address the risk management, credit policy and corporate governance challenges identified in the report increase the likelihood of the company’s return to operational and financial stability, provided that the significant current liquidity challenges are overcome. However, the company’s short-term sustainability is dependent upon successful engagement with its local and international lenders, effective collection of maturing assets, and timely payment of committed capital by shareholders. The Rating Watch rating outlooks reflect GCR’s expectation that there will be greater clarity on these outcomes over the next few months. Continued sustainability will be reliant on significant injections of capital by shareholders, access to additional debt funding, and re-commencement of measured high quality loan origination. However, capital/funding support remains uncertain given the potential for shifts in shareholder/investor sentiment as a result of the company’s materially weaker business and financial profile, reputational damage, and evidence of inadequacies in its risk management and corporate governance frameworks and practices.
Shelter Afrique’s ratings could be further downgraded if the company fails to successfully obtain the necessary creditor backing. The ratings could stabilise at their current levels or be upgraded should the company’s funding and liquidity position materially improve on the back of new capital injections and debt funding support.
|NATIONAL SCALE RATINGS HISTORY||INTERNATIONAL SCALE FC RATING HISTORY|
|Initial rating (July 2005)||Initial rating (July 2005)|
|Long term: AA(KE); Short term: A1+(KE)||Long term: BBB-|
|Outlook: Stable||Outlook: Stable|
|Last rating (February 2017)||Last rating (February 2017)|
|Long term: A+(KE); Short term: A1(KE)||Long term: BB-|
|Outlook: Negative||Outlook: Negative|
|Primary Analyst||Committee Chairperson|
|Kurt Boere||Omega Collocott|
|Credit Analyst||Sector Head: Financial Institution Ratings|
|(011) 784-1771||(011) 784-1771|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Criteria for Rating Banks and Other Financial Institutions (March 2016)
Global Criteria for Rating Multilateral Development Banks (September 2016)
Deloitte’s Factual Findings Report – Shelter Afrique (December 2016)
Shelter Afrique rating reports (2005-16)
Shelter Afrique rating announcement (February 2017)
RATING LIMITATIONS AND DISCLAIMERS
ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; and c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument.
The Company for Habitat and Housing in Africa participated in the rating process via teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed to The Company for Habitat and Housing in Africa with no contestation of the rating.
- Audited financial results of the company as at 31 December 2015 (plus four years of comparative figures)
- Unaudited interim results of the company as at 30 June 2016 and 30 November 2016
- Cash flow forecasts for the company up to 31 December 2017
- Latest internal and/or external audit report to management
- A breakdown of facilities available and related counterparties
- Corporate governance and enterprise risk framework
- Industry comparative and regulatory framework
The ratings above were solicited by, or on behalf of, The Company for Habitat and Housing in Africa, and therefore, GCR has been compensated for the provision of the ratings.
GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S FINANCIAL INSTITUTIONS GLOSSARY
|Bond||A long term debt instrument issued by either: a company, institution or the government to raise funds.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Corporate Governance||Refers to the mechanisms, processes and relations by which corporations are controlled and directed, and is used to ensure the effectiveness, accountability and transparency of an entity to its stakeholders.|
|Credit Rating||An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Default||Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.|
|Downgrade||The assignment of a lower credit rating to a company or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Forecast||A calculation or estimate of future financial events.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Liquidity Risk||The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.|
|Long-Term||Not current; ordinarily more than one year.|
|Long-Term Rating||Reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|National Scale Rating||Provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|Performing Loan||A loan is said to be performing if the borrower is paying the interest on it on a timely basis.|
|Portfolio||A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.|
|Rating Outlook||Indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Risk Management||Process of identifying and monitoring business risks in a manner that offers a risk/return relationship that is acceptable to an entity’s operating philosophy.|
|Shareholder||An individual, entity or financial institution that holds shares or stock in an organisation or company.|
|Short-Term||Current; ordinarily less than one year.|
|Short-Term Rating||An opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
|Waiver||In banking terms, a waiver is the relinquishing of rights. Sometimes also considered to be the exemption or settlement of a part of debt.|
For a detailed glossary of terms please click here
GCR downgrades Shelter Afrique’s rating to B(KE); Rating Watch.